Canadians are increasingly buying too much car and paying for it with loans that extend for six, seven and eight years, according to a federal consumer watchdog.
For many, that means high interest charges that increase the cost of the car and put consumers at risk of credit default, said Lucie Tedesco, commissioner of the Financial Consumer Agency of Canada.
Canadians brought home 1.9 million new vehicles in 2015, a record sales number.
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But those record sales, as well as the trend to larger SUVs and pickup trucks, have been financed with extended auto loans, the FCAC said in a research report issued Tuesday.
The traditional term for auto loans is about five years.
But since 2010, consumers have increasingly opted for six, seven and eight-year loans.
Buying more car or truck
"The monthly payments on extended-term loans for more expensive vehicles are often roughly the same as those for economy-class vehicles financed over conventional terms," FCAC said in its report.
So consumers can buy more car or truck if they extend payments over a longer period.
Long-term car loans constitute approximately 60 per cent of the car loan portfolios of Canada's largest financial institutions, FCAC found.
And because autos depreciate in value so quickly, the outstanding balance on the loan outstrips the value of the vehicle, often for several years. This is called negative equity.
When consumers have negative equity in the car and want to trade it in for something newer, they may face tighter credit terms and higher borrowing costs. FCAC said this is not sustainable, for either the consumers or the lenders.
"Consumers put themselves in the position of having to roll the debt owing on the long-term loan into the loan for the purchase of the new vehicle, thereby potentially stepping onto an auto-debt treadmill," Tedesco warns.
She urged consumers to educate themselves about the full interest costs they would pay during the length of the loan and to consider their own overall debt costs each month.
The Canadian Automobile Dealers' Association responded to the report by agreeing that loan terms are longer, but pointing out the low default rate on auto loans.
Dealership association responds
"Our low-rate environment means much auto debt is financed at zero per cent. In that context, it is a fully rational choice on the part of the consumer to extend the length of the loan," CADA economist Michael Hatch said in an email statement.
The association also took issue with parts of the FCAC report that describe how dealers act as intermediaries between the consumer and the lender, presenting loans to consumers from lenders that offer a percentage to the dealership.
The value of the auto loan financing market has doubled to $120 billion annually in the past eight years and it can be a very competitive business.
But CADA said dealers arrange for the best financing options for their customers and they always have options.
FCAC points to the rise of non-prime lending — loans to people who would not otherwise get credit.
Approximately one-quarter of Canada's auto finance market is non-prime, meaning very high borrowing costs. The people affected are often younger consumers or new Canadians.